Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

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life_force_prana
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Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by life_force_prana »

Hi. I want to seek advice from this wise group regarding an investing question I have been grappling with.

Background: Me (49) and wife (47) have been doing Backdoor Roth IRAs for a few years now, and are in high tax bracket. Also recently built TIPS ladder in taxable for ages 55 (target retirement age) to 59. Want to keep doing Backdoor Roth but also start building TIPS ladder for ages 60-69 in TIRA by rolling over old 401K to open TIRA. This is where the dreaded pro-rata rule comes in, that I want to avoid. No TIRAs currently, employer 401Ks have no brokerage link options to buy individual TIPS, do not like TIPS funds (or bond funds for that matter), Stable value fund is closest to my comfort but far inferior to individual TIPS IMHO.

So the way I understand, below are my 2 options:

Option 1: Continue BDR and hold off TIPS ladder buildout for now
One or both of us could lose our jobs, and force retire earlier than planned. If that happens we could buildout TIPS ladder in TIRA at that point. If we end up taking lower paid jobs, we could directly contribute to Roth IRA, and buildout TIPS ladder at that point. In either case, we may or may not get the 2%+ real yields currently available.

Option 2: Stop BDR and buildout TIPS ladder now
Allows me to take advantage of 2%+ yields, but hate stopping BDR when we are still in high tax bracket. More so after having gone through a painful exercise in 2022 of learning about pro-rata/aggregation rules to cleanout/zeroout TIRAs with old non-deductible contributions, converting after-tax contributions to Roth, moving pre-tax $s to solo401k, amending tax returns, paying taxes on conversions, etc. etc.

I am leaning towards Option 1. Am I missing something in my thinking? Is there an Option 3 or 4 or some hybrid that allows BDR and TIPS laddering...
toddthebod
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by toddthebod »

life_force_prana wrote: Thu Mar 21, 2024 4:26 pm Hi. I want to seek advice from this wise group regarding an investing question I have been grappling with.

Background: Me (49) and wife (47) have been doing Backdoor Roth IRAs for a few years now, and are in high tax bracket. Also recently built TIPS ladder in taxable for ages 55 (target retirement age) to 59. Want to keep doing Backdoor Roth but also start building TIPS ladder for ages 60-69 in TIRA by rolling over old 401K to open TIRA. This is where the dreaded pro-rata rule comes in, that I want to avoid. No TIRAs currently, employer 401Ks have no brokerage link options to buy individual TIPS, do not like TIPS funds (or bond funds for that matter), Stable value fund is closest to my comfort but far inferior to individual TIPS IMHO.

So the way I understand, below are my 2 options:

Option 1: Continue BDR and hold off TIPS ladder buildout for now
One or both of us could lose our jobs, and force retire earlier than planned. If that happens we could buildout TIPS ladder in TIRA at that point. If we end up taking lower paid jobs, we could directly contribute to Roth IRA, and buildout TIPS ladder at that point. In either case, we may or may not get the 2%+ real yields currently available.

Option 2: Stop BDR and buildout TIPS ladder now
Allows me to take advantage of 2%+ yields, but hate stopping BDR when we are still in high tax bracket. More so after having gone through a painful exercise in 2022 of learning about pro-rata/aggregation rules to cleanout/zeroout TIRAs with old non-deductible contributions, converting after-tax contributions to Roth, moving pre-tax $s to solo401k, amending tax returns, paying taxes on conversions, etc. etc.

I am leaning towards Option 1. Am I missing something in my thinking? Is there an Option 3 or 4 or some hybrid that allows BDR and TIPS laddering...
Option 3: Build TIPS ladder in your Roth, and "move" it to your Traditional IRA when you turn 55.
Topic Author
life_force_prana
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by life_force_prana »

toddthebod wrote: Thu Mar 21, 2024 4:28 pm
life_force_prana wrote: Thu Mar 21, 2024 4:26 pm Hi. I want to seek advice from this wise group regarding an investing question I have been grappling with.

Background: Me (49) and wife (47) have been doing Backdoor Roth IRAs for a few years now, and are in high tax bracket. Also recently built TIPS ladder in taxable for ages 55 (target retirement age) to 59. Want to keep doing Backdoor Roth but also start building TIPS ladder for ages 60-69 in TIRA by rolling over old 401K to open TIRA. This is where the dreaded pro-rata rule comes in, that I want to avoid. No TIRAs currently, employer 401Ks have no brokerage link options to buy individual TIPS, do not like TIPS funds (or bond funds for that matter), Stable value fund is closest to my comfort but far inferior to individual TIPS IMHO.

So the way I understand, below are my 2 options:

Option 1: Continue BDR and hold off TIPS ladder buildout for now
One or both of us could lose our jobs, and force retire earlier than planned. If that happens we could buildout TIPS ladder in TIRA at that point. If we end up taking lower paid jobs, we could directly contribute to Roth IRA, and buildout TIPS ladder at that point. In either case, we may or may not get the 2%+ real yields currently available.

Option 2: Stop BDR and buildout TIPS ladder now
Allows me to take advantage of 2%+ yields, but hate stopping BDR when we are still in high tax bracket. More so after having gone through a painful exercise in 2022 of learning about pro-rata/aggregation rules to cleanout/zeroout TIRAs with old non-deductible contributions, converting after-tax contributions to Roth, moving pre-tax $s to solo401k, amending tax returns, paying taxes on conversions, etc. etc.

I am leaning towards Option 1. Am I missing something in my thinking? Is there an Option 3 or 4 or some hybrid that allows BDR and TIPS laddering...
Option 3: Build TIPS ladder in your Roth, and "move" it to your Traditional IRA when you turn 55.
I knew could be missing an option 3. Thank you. I have been thinking about the mechanics of setting up TIPS ladder in Roth now and unwinding later to "move" to TIRA, and it seems complicated. I want to maintain my AA (incl sub-assets AA) while executing and be an even/clean trade. Have to consider swaps impacts on proportion of US vs Intl stock (I also have Dev vs EM), and SVF vs. TBM vs. individual TIPS.

So sell SVF to buy stock in 401K, simultaneously sell stock to buy TIPS in Roth. Then later at age 55, reverse trade by rolling 401K into TIRA to buy TIPS, simultaneously sell TIPS to buy stock in Roth. This seems straightforward but not clean/simple to execute. Maybe I need to think more...
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retiredjg
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by retiredjg »

I don't have an opinion, but a warning.

If you have or will use backdoor Roth in 2024, do not roll anything into tIRA until 2025. If you do, you will be back to pro-rating everything that happens in your IRA.

This has been a very common mistake this year. Apparently people who have used the backdoor method for a long time just forget about waiting that last year.

So no, you may not even get access to the 2% real return if you have to wait.
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life_force_prana
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by life_force_prana »

retiredjg wrote: Thu Mar 21, 2024 5:16 pm I don't have an opinion, but a warning.

If you have or will use backdoor Roth in 2024, do not roll anything into tIRA until 2025. If you do, you will be back to pro-rating everything that happens in your IRA.

This has been a very common mistake this year. Apparently people who have used the backdoor method for a long time just forget about waiting that last year.

So no, you may not even get access to the 2% real return if you have to wait.
Yes that is the trade-off. I have not done backdoor Roth in 2024 yet because of this conundrum...
drk
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by drk »

life_force_prana wrote: Thu Mar 21, 2024 4:26 pm do not like TIPS funds
It seems like they would help you accomplish your goal, though. Maybe spend some time reviewing #Cruncher's Consistent Yield & Duration to Help Choose TIPS Fund. There are some posters who use a combination of TIPS funds to simulate a TIPS ladder (e.g., viewtopic.php?p=7637829#p7636981).
A useful razor: anyone asking about speculative strategies on Bogleheads.org has no business using them.
lakpr
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by lakpr »

You could continue to make the non-deductible contributions to a tIRA, keep accumulating the basis. Within this n-d-tIRA, invest in TIPS ladder. Move the equivalent amount from fixed income to equities in your 401(k).

You will be starting small, though. Only $7k per year (plus inflation adjustments applicable to IRA contributions)

When you retire and you know you will not be adding any more to the 401(k), reverse the equation. Leave the 401(k) in place until the following year, do NOT rollover to a tIRA.

Sell everything in the n-d-tIRA and convert to Roth and move to equities. You will owe taxes on the growth at the time of Roth conversion, but this is possibly going to be only 2% real growth per year, so the tax bite may not be onerous. In the 401(k), move from equities to fixed income.

Following year, move from 401(k) to tIRA if you so desire.

Just an idea ...
JBTX
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by JBTX »

lakpr wrote: Thu Mar 21, 2024 6:22 pm You could continue to make the non-deductible contributions to a tIRA, keep accumulating the basis. Within this n-d-tIRA, invest in TIPS ladder. Move the equivalent amount from fixed income to equities in your 401(k).

You will be starting small, though. Only $7k per year (plus inflation adjustments applicable to IRA contributions)

When you retire and you know you will not be adding any more to the 401(k), reverse the equation. Leave the 401(k) in place until the following year, do NOT rollover to a tIRA.

Sell everything in the n-d-tIRA and convert to Roth and move to equities. You will owe taxes on the growth at the time of Roth conversion, but this is possibly going to be only 2% real growth per year, so the tax bite may not be onerous. In the 401(k), move from equities to fixed income.

Following year, move from 401(k) to tIRA if you so desire.

Just an idea ...
A variant of this would be to contribute to the ND IRA each year, and not convert to Roth, but also roll 401k over to rollover Ira and build your tips ladder. In this scenario you would have to track 8606 basis, but would not experience any proration during the accumulation phase. Eventually when you retire, convert NDs to Roth, at the same time you are either drawing on your rollover IRA (or Roth converting it) and at that point the proration actually helps marginally lower your tax burden on the rollover since you will have some basis.

This option would come with some complication of filing 8606’s and tracking basis.
JBTX
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by JBTX »

life_force_prana wrote: Thu Mar 21, 2024 4:59 pm
toddthebod wrote: Thu Mar 21, 2024 4:28 pm
life_force_prana wrote: Thu Mar 21, 2024 4:26 pm Hi. I want to seek advice from this wise group regarding an investing question I have been grappling with.

Background: Me (49) and wife (47) have been doing Backdoor Roth IRAs for a few years now, and are in high tax bracket. Also recently built TIPS ladder in taxable for ages 55 (target retirement age) to 59. Want to keep doing Backdoor Roth but also start building TIPS ladder for ages 60-69 in TIRA by rolling over old 401K to open TIRA. This is where the dreaded pro-rata rule comes in, that I want to avoid. No TIRAs currently, employer 401Ks have no brokerage link options to buy individual TIPS, do not like TIPS funds (or bond funds for that matter), Stable value fund is closest to my comfort but far inferior to individual TIPS IMHO.

So the way I understand, below are my 2 options:

Option 1: Continue BDR and hold off TIPS ladder buildout for now
One or both of us could lose our jobs, and force retire earlier than planned. If that happens we could buildout TIPS ladder in TIRA at that point. If we end up taking lower paid jobs, we could directly contribute to Roth IRA, and buildout TIPS ladder at that point. In either case, we may or may not get the 2%+ real yields currently available.

Option 2: Stop BDR and buildout TIPS ladder now
Allows me to take advantage of 2%+ yields, but hate stopping BDR when we are still in high tax bracket. More so after having gone through a painful exercise in 2022 of learning about pro-rata/aggregation rules to cleanout/zeroout TIRAs with old non-deductible contributions, converting after-tax contributions to Roth, moving pre-tax $s to solo401k, amending tax returns, paying taxes on conversions, etc. etc.

I am leaning towards Option 1. Am I missing something in my thinking? Is there an Option 3 or 4 or some hybrid that allows BDR and TIPS laddering...
Option 3: Build TIPS ladder in your Roth, and "move" it to your Traditional IRA when you turn 55.
I knew could be missing an option 3. Thank you. I have been thinking about the mechanics of setting up TIPS ladder in Roth now and unwinding later to "move" to TIRA, and it seems complicated. I want to maintain my AA (incl sub-assets AA) while executing and be an even/clean trade. Have to consider swaps impacts on proportion of US vs Intl stock (I also have Dev vs EM), and SVF vs. TBM vs. individual TIPS.

So sell SVF to buy stock in 401K, simultaneously sell stock to buy TIPS in Roth. Then later at age 55, reverse trade by rolling 401K into TIRA to buy TIPS, simultaneously sell TIPS to buy stock in Roth. This seems straightforward but not clean/simple to execute. Maybe I need to think more...
To complicate this more and risk seeking perfection at the expense of good enough….

Presumably you have your stocks in Roth because you want to get the excess growth tax free. In reality, you have more in a Roth on an after tax basis than a traditional. In your traditional some portion of that is future tax liability.

Let’s assume your best estimate of future marginal rate of withdrawal is 12%. And assume you want to set up the equivalent of $100k traditional Ira tips ladder into your Roth. Thus you would set up $88k of tips ladder in the Roth. On the flip side, you are going to move that $88k of Roth equity to your traditional, so in the traditional you invest $100k in stocks.
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by RyeBourbon »

drk wrote: Thu Mar 21, 2024 6:16 pm
life_force_prana wrote: Thu Mar 21, 2024 4:26 pm do not like TIPS funds
It seems like they would help you accomplish your goal, though. Maybe spend some time reviewing #Cruncher's Consistent Yield & Duration to Help Choose TIPS Fund. There are some posters who use a combination of TIPS funds to simulate a TIPS ladder (e.g., viewtopic.php?p=7637829#p7636981).
OP can hold TIPS funds for now to get the 2% yield until they are able to buy the ladder.
Retired June 2023. AA = 55/35/10
Topic Author
life_force_prana
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by life_force_prana »

RyeBourbon wrote: Fri Mar 22, 2024 8:22 am
drk wrote: Thu Mar 21, 2024 6:16 pm
life_force_prana wrote: Thu Mar 21, 2024 4:26 pm do not like TIPS funds
It seems like they would help you accomplish your goal, though. Maybe spend some time reviewing #Cruncher's Consistent Yield & Duration to Help Choose TIPS Fund. There are some posters who use a combination of TIPS funds to simulate a TIPS ladder (e.g., viewtopic.php?p=7637829#p7636981).
OP can hold TIPS funds for now to get the 2% yield until they are able to buy the ladder.
Thanks @RyeBourbon (love that name BTW) and drk for the nudge to look into TIPS funds. Main reason I do not like them is because I do not understand them well enough. So if I go this route, my 401K offers DFA Inflation Protected Securities (DIPSX) --> https://www.dimensional.com/us-en/funds ... ortfolio-i

I looked through those posts links but not sure I understand how to apply to my situation. For example, if I buy individual TIPS maturing 2040-2044, I know I am getting/locking in 2% to 2.2% real based on yesterdays data.

If I go with DIPSX, it says avg. maturity 7.43 and avg. duration 6.74 and YTM 1.99%. Does that mean if I buy $100K on Monday, I lock in 1.99% real yield on $100K guaranteed till 2031, roughly around time I want to retire, then rollover 401K to TIRA and buy TIPS ladder to mature 2040-2044 at whatever market is at then? If yes, then I am still exposed in 2031 but with TIPS ladder now, my $100K is guaranteed 2%+ till 2044...so not sure DIPSX solves the problem?
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life_force_prana
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by life_force_prana »

drk wrote: Thu Mar 21, 2024 6:16 pm
life_force_prana wrote: Thu Mar 21, 2024 4:26 pm do not like TIPS funds
It seems like they would help you accomplish your goal, though. Maybe spend some time reviewing #Cruncher's Consistent Yield & Duration to Help Choose TIPS Fund. There are some posters who use a combination of TIPS funds to simulate a TIPS ladder (e.g., viewtopic.php?p=7637829#p7636981).
Thanks for suggestion but this led me to more questions above...
Topic Author
life_force_prana
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by life_force_prana »

lakpr wrote: Thu Mar 21, 2024 6:22 pm You could continue to make the non-deductible contributions to a tIRA, keep accumulating the basis. Within this n-d-tIRA, invest in TIPS ladder. Move the equivalent amount from fixed income to equities in your 401(k).

You will be starting small, though. Only $7k per year (plus inflation adjustments applicable to IRA contributions)

When you retire and you know you will not be adding any more to the 401(k), reverse the equation. Leave the 401(k) in place until the following year, do NOT rollover to a tIRA.

Sell everything in the n-d-tIRA and convert to Roth and move to equities. You will owe taxes on the growth at the time of Roth conversion, but this is possibly going to be only 2% real growth per year, so the tax bite may not be onerous. In the 401(k), move from equities to fixed income.

Following year, move from 401(k) to tIRA if you so desire.

Just an idea ...
Thanks for the idea, it is an interesting one. I could start buying TIPS in 7K chunks, move 7k of SVF to equity each year, keep track of basis in 8606, and then once retired reverse trade by converting ND TIRA dollars to Roth, pay tax on gains (interest and inflation accruals), buy equities in Roth, roll 401K to TIRA, buy TIPS selling equities...hmm sounds like a lot of work and complexity for 7K times maybe 5-6 years at unknown real yields in future...worth considering though.
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life_force_prana
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by life_force_prana »

JBTX wrote: Fri Mar 22, 2024 3:04 am
life_force_prana wrote: Thu Mar 21, 2024 4:59 pm
toddthebod wrote: Thu Mar 21, 2024 4:28 pm
life_force_prana wrote: Thu Mar 21, 2024 4:26 pm Hi. I want to seek advice from this wise group regarding an investing question I have been grappling with.

Background: Me (49) and wife (47) have been doing Backdoor Roth IRAs for a few years now, and are in high tax bracket. Also recently built TIPS ladder in taxable for ages 55 (target retirement age) to 59. Want to keep doing Backdoor Roth but also start building TIPS ladder for ages 60-69 in TIRA by rolling over old 401K to open TIRA. This is where the dreaded pro-rata rule comes in, that I want to avoid. No TIRAs currently, employer 401Ks have no brokerage link options to buy individual TIPS, do not like TIPS funds (or bond funds for that matter), Stable value fund is closest to my comfort but far inferior to individual TIPS IMHO.

So the way I understand, below are my 2 options:

Option 1: Continue BDR and hold off TIPS ladder buildout for now
One or both of us could lose our jobs, and force retire earlier than planned. If that happens we could buildout TIPS ladder in TIRA at that point. If we end up taking lower paid jobs, we could directly contribute to Roth IRA, and buildout TIPS ladder at that point. In either case, we may or may not get the 2%+ real yields currently available.

Option 2: Stop BDR and buildout TIPS ladder now
Allows me to take advantage of 2%+ yields, but hate stopping BDR when we are still in high tax bracket. More so after having gone through a painful exercise in 2022 of learning about pro-rata/aggregation rules to cleanout/zeroout TIRAs with old non-deductible contributions, converting after-tax contributions to Roth, moving pre-tax $s to solo401k, amending tax returns, paying taxes on conversions, etc. etc.

I am leaning towards Option 1. Am I missing something in my thinking? Is there an Option 3 or 4 or some hybrid that allows BDR and TIPS laddering...
Option 3: Build TIPS ladder in your Roth, and "move" it to your Traditional IRA when you turn 55.
I knew could be missing an option 3. Thank you. I have been thinking about the mechanics of setting up TIPS ladder in Roth now and unwinding later to "move" to TIRA, and it seems complicated. I want to maintain my AA (incl sub-assets AA) while executing and be an even/clean trade. Have to consider swaps impacts on proportion of US vs Intl stock (I also have Dev vs EM), and SVF vs. TBM vs. individual TIPS.

So sell SVF to buy stock in 401K, simultaneously sell stock to buy TIPS in Roth. Then later at age 55, reverse trade by rolling 401K into TIRA to buy TIPS, simultaneously sell TIPS to buy stock in Roth. This seems straightforward but not clean/simple to execute. Maybe I need to think more...
To complicate this more and risk seeking perfection at the expense of good enough….

Presumably you have your stocks in Roth because you want to get the excess growth tax free. In reality, you have more in a Roth on an after tax basis than a traditional. In your traditional some portion of that is future tax liability.

Let’s assume your best estimate of future marginal rate of withdrawal is 12%. And assume you want to set up the equivalent of $100k traditional Ira tips ladder into your Roth. Thus you would set up $88k of tips ladder in the Roth. On the flip side, you are going to move that $88k of Roth equity to your traditional, so in the traditional you invest $100k in stocks.
Wow! The level of sophisticated thinking in this forum is amazing!

I am going to think about lakpr and your ideas. If I understand the variation you offer to lakpr's version is doing ND TIRA 7K contributions but also doing 401K rollover to open separate rollover IRA simultaneously and rest is same (and the marginal tax effect on amount difference between Roth vs traditional)?
drk
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by drk »

life_force_prana wrote: Fri Mar 22, 2024 2:13 pm If I go with DIPSX, it says avg. maturity 7.43 and avg. duration 6.74 and YTM 1.99%. Does that mean if I buy $100K on Monday, I lock in 1.99% real yield on $100K guaranteed till 2031, roughly around time I want to retire, then rollover 401K to TIRA and buy TIPS ladder to mature 2040-2044 at whatever market is at then? If yes, then I am still exposed in 2031 but with TIPS ladder now, my $100K is guaranteed 2%+ till 2044...so not sure DIPSX solves the problem?
Yes, you have a duration mismatch with that single TIPS fund. You could combine it with LTPZ in your Roth IRA to match the duration for your desired ladder, selling some LTPZ and buying some DIPSX every year. At retirement, sell both funds and buy your TIPS ladder. Maybe call this option 3B. It's not simpler than regular option 3, but it would let you use your pre-tax space.

OTOH, you might just use DIPSX and call it good enough. If real yields stay high, you'll capture them by maintaining constant-ish duration. If real yields decline significantly, the fund would appreciate in value, so you might decide to rebalance into stocks or just buy an annuity anyway.
A useful razor: anyone asking about speculative strategies on Bogleheads.org has no business using them.
lakpr
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by lakpr »

life_force_prana wrote: Fri Mar 22, 2024 2:34 pm Wow! The level of sophisticated thinking in this forum is amazing!

I am going to think about lakpr and your ideas. If I understand the variation you offer to lakpr's version is doing ND TIRA 7K contributions but also doing 401K rollover to open separate rollover IRA simultaneously and rest is same (and the marginal tax effect on amount difference between Roth vs traditional)?
I will let JBTX answer, but I don't think rolling over the 401(k) to a separate rollover IRA is required. You are only trying to shift the investments from fixed income instruments to equities within a tax-deferred account. That can be a SVF --> equity fund move within your 401(k). JBTX's variation is to just what we call "tax-adjusting" the money to be moved within the 401(k) [ or rollover IRA ], taking a best guess at the marginal tax bracket in retirement.
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by JBTX »

lakpr wrote: Fri Mar 22, 2024 3:28 pm
life_force_prana wrote: Fri Mar 22, 2024 2:34 pm Wow! The level of sophisticated thinking in this forum is amazing!

I am going to think about lakpr and your ideas. If I understand the variation you offer to lakpr's version is doing ND TIRA 7K contributions but also doing 401K rollover to open separate rollover IRA simultaneously and rest is same (and the marginal tax effect on amount difference between Roth vs traditional)?
I will let JBTX answer, but I don't think rolling over the 401(k) to a separate rollover IRA is required. You are only trying to shift the investments from fixed income instruments to equities within a tax-deferred account. That can be a SVF --> equity fund move within your 401(k). JBTX's variation is to just what we call "tax-adjusting" the money to be moved within the 401(k) [ or rollover IRA ], taking a best guess at the marginal tax bracket in retirement.
The two different options I was addressing were

- Don’t roll over the 401k, and do the TIPS ladder in the Roth, and tax adjust the balances
Or
- Rollover the 401k, do the tips ladder in the traditional, and if you needed further bond traditional space do the non deductible IRAs and don’t Roth convert them until you start tapping your traditional IRAs.
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life_force_prana
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by life_force_prana »

drk wrote: Fri Mar 22, 2024 2:54 pm
life_force_prana wrote: Fri Mar 22, 2024 2:13 pm If I go with DIPSX, it says avg. maturity 7.43 and avg. duration 6.74 and YTM 1.99%. Does that mean if I buy $100K on Monday, I lock in 1.99% real yield on $100K guaranteed till 2031, roughly around time I want to retire, then rollover 401K to TIRA and buy TIPS ladder to mature 2040-2044 at whatever market is at then? If yes, then I am still exposed in 2031 but with TIPS ladder now, my $100K is guaranteed 2%+ till 2044...so not sure DIPSX solves the problem?
Yes, you have a duration mismatch with that single TIPS fund. You could combine it with LTPZ in your Roth IRA to match the duration for your desired ladder, selling some LTPZ and buying some DIPSX every year. At retirement, sell both funds and buy your TIPS ladder. Maybe call this option 3B. It's not simpler than regular option 3, but it would let you use your pre-tax space.

OTOH, you might just use DIPSX and call it good enough. If real yields stay high, you'll capture them by maintaining constant-ish duration. If real yields decline significantly, the fund would appreciate in value, so you might decide to rebalance into stocks or just buy an annuity anyway.
Ok thanks. I do like the simplicity of calling it good enough with DIPSX for now. If real yields stay high then I can always swap it for TIPS ladder, if they fall and price increases got to figure out what to do then. But that is what I have to figure out anyways with the TBM funds I have held onto. My retirement goal for fixed income eventually is only assets whose balances in nominal terms never decrease (IBonds, EE Bonds, individual TIPS and TBills held to maturity, SVF, HYSA)
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life_force_prana
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by life_force_prana »

Got it, thanks lakpr and JBTX.
RyeBourbon
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by RyeBourbon »

life_force_prana wrote: Fri Mar 22, 2024 2:13 pm
RyeBourbon wrote: Fri Mar 22, 2024 8:22 am
drk wrote: Thu Mar 21, 2024 6:16 pm
life_force_prana wrote: Thu Mar 21, 2024 4:26 pm do not like TIPS funds
It seems like they would help you accomplish your goal, though. Maybe spend some time reviewing #Cruncher's Consistent Yield & Duration to Help Choose TIPS Fund. There are some posters who use a combination of TIPS funds to simulate a TIPS ladder (e.g., viewtopic.php?p=7637829#p7636981).
OP can hold TIPS funds for now to get the 2% yield until they are able to buy the ladder.
Thanks @RyeBourbon (love that name BTW) and drk for the nudge to look into TIPS funds. Main reason I do not like them is because I do not understand them well enough. So if I go this route, my 401K offers DFA Inflation Protected Securities (DIPSX) --> https://www.dimensional.com/us-en/funds ... ortfolio-i

I looked through those posts links but not sure I understand how to apply to my situation. For example, if I buy individual TIPS maturing 2040-2044, I know I am getting/locking in 2% to 2.2% real based on yesterdays data.

If I go with DIPSX, it says avg. maturity 7.43 and avg. duration 6.74 and YTM 1.99%. Does that mean if I buy $100K on Monday, I lock in 1.99% real yield on $100K guaranteed till 2031, roughly around time I want to retire, then rollover 401K to TIRA and buy TIPS ladder to mature 2040-2044 at whatever market is at then? If yes, then I am still exposed in 2031 but with TIPS ladder now, my $100K is guaranteed 2%+ till 2044...so not sure DIPSX solves the problem?
You're not going to really "lock" anything in with the TIPS fund, but the price of the fund and the price of the ladder will move together at least for a short period (maybe a year or two). I wouldn't count on them staying in lockstep for 7 years, but as drk said, you can use two funds to emulate the ladder until you are ready to purchase. I did this with FIPDX (duration of about 6.5 years), tracking it for about a year and the fund value tracked the price of a ladder of similar duration. My ladder was going to be a bridge to SS (10 years), but I've since just decided to use two funds (SCHP and STIP) for flexibility.
Retired June 2023. AA = 55/35/10
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life_force_prana
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Plan to exit Bonds Funds

Post by life_force_prana »

[Thread merged into here --admin LadyGeek]

I like my fixed income to never go down in nominal terms. Hence, I like I/EE Bonds, individual TIPS/T-Bills held to maturity, HYSA and Stable Value Funds (all of which I call Cash-like). My AA is 65/35 and of the 35, 25% is Cash-like, with remaining 10% in Total Bond Index (in 401Ks) and VTEB (in taxable).

I am thinking about best plan to exit this 10% and get to AA 65/35 with all 35% in cash-like. I am in no rush and prefer to get there over time. I am likely 5-8 years from retiring. All new money for most part is going to I/EE/TIPS/Tbills/HYSA/SVF.

My current thinking is to wait till interest rates drop then exit Total Bond in 401Ks to either SVF or Stocks to stay at 65/35 AA. And to exit VTEB in taxable upon retirement as am currently in highest tax bracket.

Could you please critique my plan? Would you offer a different plan?
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Re: Plan to exit Bonds Funds

Post by dbr »

If you like your bond funds to never go down you should also like your bond funds to never go up. Those are two features of the same territory. There is no surety interest rates will go down soon or before they go up again or might go down and then up again before you act.

At this point if you don't want those funds probably you should just sell them. If you really would like to have them when they go up sometime you should just keep them up or down as the chips fall.
dcabler
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Re: Plan to exit Bonds Funds

Post by dcabler »

life_force_prana wrote: Mon Apr 01, 2024 3:52 pm I like my fixed income to never go down in nominal terms. Hence, I like I/EE Bonds, individual TIPS/T-Bills held to maturity, HYSA and Stable Value Funds (all of which I call Cash-like). My AA is 65/35 and of the 35, 25% is Cash-like, with remaining 10% in Total Bond Index (in 401Ks) and VTEB (in taxable).

I am thinking about best plan to exit this 10% and get to AA 65/35 with all 35% in cash-like. I am in no rush and prefer to get there over time. I am likely 5-8 years from retiring. All new money for most part is going to I/EE/TIPS/Tbills/HYSA/SVF.

My current thinking is to wait till interest rates drop then exit Total Bond in 401Ks to either SVF or Stocks to stay at 65/35 AA. And to exit VTEB in taxable upon retirement as am currently in highest tax bracket.

Could you please critique my plan? Would you offer a different plan?
Even if your individual TIPS are held till maturity, their market value is going to move around all along the way - just like a bond fund composed of multiple TIPS does. You're holding till maturity, so you can ignore it, but it's still going to happen. Also, what are your plans for the coupon payments?

Cheers.
rockstar
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Re: Plan to exit Bonds Funds

Post by rockstar »

Makes sense to me if you want a guaranteed return of your principal.
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life_force_prana
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Re: Plan to exit Bonds Funds

Post by life_force_prana »

dcabler wrote: Mon Apr 01, 2024 4:51 pm
life_force_prana wrote: Mon Apr 01, 2024 3:52 pm I like my fixed income to never go down in nominal terms. Hence, I like I/EE Bonds, individual TIPS/T-Bills held to maturity, HYSA and Stable Value Funds (all of which I call Cash-like). My AA is 65/35 and of the 35, 25% is Cash-like, with remaining 10% in Total Bond Index (in 401Ks) and VTEB (in taxable).

I am thinking about best plan to exit this 10% and get to AA 65/35 with all 35% in cash-like. I am in no rush and prefer to get there over time. I am likely 5-8 years from retiring. All new money for most part is going to I/EE/TIPS/Tbills/HYSA/SVF.

My current thinking is to wait till interest rates drop then exit Total Bond in 401Ks to either SVF or Stocks to stay at 65/35 AA. And to exit VTEB in taxable upon retirement as am currently in highest tax bracket.

Could you please critique my plan? Would you offer a different plan?
Even if your individual TIPS are held till maturity, their market value is going to move around all along the way - just like a bond fund composed of multiple TIPS does. You're holding till maturity, so you can ignore it, but it's still going to happen. Also, what are your plans for the coupon payments?

Cheers.
I understand price changes along way, but they do not matter as I ignore them till maturity. Coupons get reinvested or may get used in retirement. This also doesnt matter to me as I am not looking to maximize/optimize yield.
Big Shon
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Re: Plan to exit Bonds Funds

Post by Big Shon »

I like the way you think. I sold VBILX at a loss, ditched a TIPS fund that wasn't doing its job, and after several years in it since retirement, sold all my Wellesley for a slight gain after growing weary of seeing the heavy bond portion drag it down time and again. I am very wary of bonds now, though recognize they did rather well for what, 30 years? The VG TBM in my 401K did fine for years. But those days have been gone for a few years, and can't see what will change that.

I am now in cash yielding >5%, as well as a couple of preferred stocks I got at discount, yielding 8%, and certain to be called in a couple of years at par value of $25/share. Sounds like a pretty good bond proxy to me. Preferred stocks don't get enough credit as an FI component.
Last edited by Big Shon on Mon Apr 01, 2024 5:38 pm, edited 1 time in total.
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life_force_prana
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Re: Plan to exit Bonds Funds

Post by life_force_prana »

rockstar wrote: Mon Apr 01, 2024 4:55 pm Makes sense to me if you want a guaranteed return of your principal.
Exactly. FI needs to be cash-like to me. Not looking to get rich, just what I put in plus some yield, call it good enough. Predictable and no surprises.
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Re: Plan to exit Bonds Funds

Post by life_force_prana »

Big Shon wrote: Mon Apr 01, 2024 5:33 pm I like the way you think. I sold VBILX at a loss, ditched a TIPS fund, and after several years sold all my Wellesley for a slight gain after growing weary of seeing the heavy bond portion drag it down time and again. I am very wary of bonds now, though recognize they did rather well for what, 30 years? The VG TBM in my 401K did fine for years. But I those days have been gone for a few years, and can't see what will change that.

I am now in cash yielding >5%, as well as a couple of preferred stocks I got at discount, yielding 8%, and certain to be called in a couple of years. Sounds like a pretty good bond proxy to me.
Thanks. Now as far as you assets, if you mean all your fixed income is cash cash and preferred stocks then I would be worried. Some duration matched FI with some longer term individual bonds maybe better as these 5%+ yields may vanish. Also pref stocks have stock like fluctuations. Thats why I like standard boring treasury bonds held to maturity and I/EE savings bonds.
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Re: Plan to exit Bonds Funds

Post by life_force_prana »

dbr wrote: Mon Apr 01, 2024 3:56 pm If you like your bond funds to never go down you should also like your bond funds to never go up. Those are two features of the same territory. There is no surety interest rates will go down soon or before they go up again or might go down and then up again before you act.

At this point if you don't want those funds probably you should just sell them. If you really would like to have them when they go up sometime you should just keep them up or down as the chips fall.
I think I understand your point. But then again I am not looking to get out at the "perfect time" because I know I cannot. All I am looking for is good enough low rate environment whenever it comes and I can wait. I know that is not now, and there is an in-between "now" and "perfect time"....
rockstar
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Re: Plan to exit Bonds Funds

Post by rockstar »

life_force_prana wrote: Mon Apr 01, 2024 5:40 pm
Big Shon wrote: Mon Apr 01, 2024 5:33 pm I like the way you think. I sold VBILX at a loss, ditched a TIPS fund, and after several years sold all my Wellesley for a slight gain after growing weary of seeing the heavy bond portion drag it down time and again. I am very wary of bonds now, though recognize they did rather well for what, 30 years? The VG TBM in my 401K did fine for years. But I those days have been gone for a few years, and can't see what will change that.

I am now in cash yielding >5%, as well as a couple of preferred stocks I got at discount, yielding 8%, and certain to be called in a couple of years. Sounds like a pretty good bond proxy to me.
Thanks. Now as far as you assets, if you mean all your fixed income is cash cash and preferred stocks then I would be worried. Some duration matched FI with some longer term individual bonds maybe better as these 5%+ yields may vanish. Also pref stocks have stock like fluctuations. Thats why I like standard boring treasury bonds held to maturity and I/EE savings bonds.
This makes sense. After the cash like emergency fund in short term, you’re gonna want some duration that you can hold to maturity to lock in the real returns available today pretax. It’s really a question of how much and how much duration. I’m looking at 3-7 years for me in tax deferred as I like TIPS.
Big Shon
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Re: Plan to exit Bonds Funds

Post by Big Shon »

life_force_prana wrote: Mon Apr 01, 2024 5:40 pm
Big Shon wrote: Mon Apr 01, 2024 5:33 pm I like the way you think. I sold VBILX at a loss, ditched a TIPS fund, and after several years sold all my Wellesley for a slight gain after growing weary of seeing the heavy bond portion drag it down time and again. I am very wary of bonds now, though recognize they did rather well for what, 30 years? The VG TBM in my 401K did fine for years. But I those days have been gone for a few years, and can't see what will change that.

I am now in cash yielding >5%, as well as a couple of preferred stocks I got at discount, yielding 8%, and certain to be called in a couple of years. Sounds like a pretty good bond proxy to me.
Thanks. Now as far as you assets, if you mean all your fixed income is cash cash and preferred stocks then I would be worried. Some duration matched FI with some longer term individual bonds maybe better as these 5%+ yields may vanish. Also pref stocks have stock like fluctuations. Thats why I like standard boring treasury bonds held to maturity.
If you buy a fixed-to-float preferred stock at discount, and the float rate is so generous that it is likely not viable for the company to continue to pay after call date, then it will probably be called. At that time, you get the par price of 25/share (keep in mind you bought it for less than that), as well as all the quarterly high dividends you have amassed since purchase. Ka-ching, ka-ching.

I understand the 5+% yields in cash may not last, and will cross that bridge when I come to it. In the meantime, I'm happy to be out of bond funds. Not going to mess around with individual bonds. 8-)
Last edited by Big Shon on Mon Apr 01, 2024 5:49 pm, edited 1 time in total.
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beyou
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Re: Plan to exit Bonds Funds

Post by beyou »

This thread is another example of market timing, not much different from the threads such as "should I go 100% VTSAX" when the market is up,
and "I'll never invest in stocks again" when the market is down.

I say this because nobody talked about this topic back when money market funds, CDs, HYSA all paid nearly zero interest.
Now that they pay more interest, stable value is the only acceptable fixed income.

Just be sure you can handle if you lock up your money at a fixed rate, you can deal with rising rate and the fact that you'll be getting a lower coupon than others buying new bonds.

Just be sure you can handle if mmkt fund and CD rates decline back to zero at some point.

Yeah, I know you say you don't care....but you don't care NOW, when safe instruments seemingly have "high" rates.
But these rates are only high compared to a couple years ago, not compared to decades past.

Just saying...this is NOT my plan. Yes we all lost $ on intermediate/long bonds in last year, but we also made money on equities.
This is why you rebalance, buy low sell high and get to your risk tolerance. Going to cash like instruments is simply getting out of the market.
Buying long term bonds outside a fund is fooling yourself if they are the same type of bonds held by a fund, you get similar results, whether you want to believe it's true or not. This bond vs bond fund preference is almost a religious debate. IMO asking for opinions on that topic is like asking for the best religion to follow. You wont get a "right" answer.
Last edited by beyou on Mon Apr 01, 2024 5:50 pm, edited 1 time in total.
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Re: Plan to exit Bonds Funds

Post by Silverado »

Doesn’t seem like a good plan to me. But sounds like you are doing it regardless of critique, which is of course fine. I don’t pay much attention to what my bond funds do year to year, I just buy them like I buy equities. Used to be a lot more equities, but now it is a lot more bond fund each month. Seems possible this is the best time in my investing career to being buying US Bond Index. Possible it will be the worst as well. Either way, it’s head down and keep plowing along. Might buy a couple individual bonds sometime soon just for the experience.
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Re: Plan to exit Bonds Funds

Post by rockstar »

Silverado wrote: Mon Apr 01, 2024 5:50 pm Doesn’t seem like a good plan to me. But sounds like you are doing it regardless of critique, which is of course fine. I don’t pay much attention to what my bond funds do year to year, I just buy them like I buy equities. Used to be a lot more equities, but now it is a lot more bond fund each month. Seems possible this is the best time in my investing career to being buying US Bond Index. Possible it will be the worst as well. Either way, it’s head down and keep plowing along. Might buy a couple individual bonds sometime soon just for the experience.
Much better than buying a zero or negative real yield like in the past. You can with certainty buy a 2% real yield pretax across must of the curve. Certain bits are lower. But most will get you 2%+ real. That’s a good bond return.
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Re: Plan to exit Bonds Funds

Post by life_force_prana »

beyou wrote: Mon Apr 01, 2024 5:49 pm This thread is another example of market timing, not much different from the threads such as "should I go 100% VTSAX" when the market is up,
and "I'll never invest in stocks again" when the market is down.
This is more like "should I go 100% VTSAX" when market is down, or "Ill never invest in stock again" when market is high...exact opposite of what you are saying...also in bonds where math is well defined unlike stocks...

I get your point about bonds vs bond funds debate, and was hoping to not get dragged there. Also agree its easy to go cash-like in this high rate environment and will get tested in zero rate environment...but between duration matched TIPS ladder, loaded up I/EE bonds using entity/trust/gifts etc, and Tbills, I might be ok...
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Re: Plan to exit Bonds Funds

Post by life_force_prana »

Silverado wrote: Mon Apr 01, 2024 5:50 pm Doesn’t seem like a good plan to me. But sounds like you are doing it regardless of critique, which is of course fine. I don’t pay much attention to what my bond funds do year to year, I just buy them like I buy equities. Used to be a lot more equities, but now it is a lot more bond fund each month. Seems possible this is the best time in my investing career to being buying US Bond Index. Possible it will be the worst as well. Either way, it’s head down and keep plowing along. Might buy a couple individual bonds sometime soon just for the experience.
I did not pay much attention to my Bond Index funds either accumulating, neither do much today (infact I am reimvesting dividends in my 401k so am buying cheap) but I know it will matter when I am in retirement and 2022 happens...it is easy/good bond accumulation tool in 401k etc., but not much help in decumulating...
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Re: Plan to exit Bonds Funds

Post by life_force_prana »

Big Shon wrote: Mon Apr 01, 2024 5:48 pm
life_force_prana wrote: Mon Apr 01, 2024 5:40 pm
Big Shon wrote: Mon Apr 01, 2024 5:33 pm I like the way you think. I sold VBILX at a loss, ditched a TIPS fund, and after several years sold all my Wellesley for a slight gain after growing weary of seeing the heavy bond portion drag it down time and again. I am very wary of bonds now, though recognize they did rather well for what, 30 years? The VG TBM in my 401K did fine for years. But I those days have been gone for a few years, and can't see what will change that.

I am now in cash yielding >5%, as well as a couple of preferred stocks I got at discount, yielding 8%, and certain to be called in a couple of years. Sounds like a pretty good bond proxy to me.
Thanks. Now as far as you assets, if you mean all your fixed income is cash cash and preferred stocks then I would be worried. Some duration matched FI with some longer term individual bonds maybe better as these 5%+ yields may vanish. Also pref stocks have stock like fluctuations. Thats why I like standard boring treasury bonds held to maturity.
If you buy a fixed-to-float preferred stock at discount, and the float rate is so generous that it is likely not viable for the company to continue to pay after call date, then it will probably be called. At that time, you get the par price of 25/share (keep in mind you bought it for less than that), as well as all the quarterly high dividends you have amassed since purchase. Ka-ching, ka-ching.

I understand the 5+% yields in cash may not last, and will cross that bridge when I come to it. In the meantime, I'm happy to be out of bond funds. Not going to mess around with individual bonds. 8-)
Got it. To me individual bonds seem easier and looks like you know pref stocks....different strokes...
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Re: Plan to exit Bonds Funds

Post by SnowBog »

rockstar wrote: Mon Apr 01, 2024 5:58 pm
Silverado wrote: Mon Apr 01, 2024 5:50 pm Doesn’t seem like a good plan to me. But sounds like you are doing it regardless of critique, which is of course fine. I don’t pay much attention to what my bond funds do year to year, I just buy them like I buy equities. Used to be a lot more equities, but now it is a lot more bond fund each month. Seems possible this is the best time in my investing career to being buying US Bond Index. Possible it will be the worst as well. Either way, it’s head down and keep plowing along. Might buy a couple individual bonds sometime soon just for the experience.
Much better than buying a zero or negative real yield like in the past. You can with certainty buy a 2% real yield pretax across must of the curve. Certain bits are lower. But most will get you 2%+ real. That’s a good bond return.
But OP isn't moving 100% to TIPS... OP isn't (as least as I understand) never going to buy TIPS in the future, where/when again they might end up having a "zero or negative" real yield - you know, just like in the past..

Again, this appears to be an exercise in "market timing." Right now, today, with rates as they are - this model might "make sense"...

Will it if/when we face deflationary periods, falling rates, etc.? When maybe OP needs to add a lot of bonds to maintain their AA and the only ones they can get have horrible interest rates?

In other words - OP is creating a larger interest rate risk with this approach. If future rates go down, they won't be able to maintain the high rates they have now, and could very well end up losing to inflation. Sure, they don't have to "watch" their principle get smaller... But "losing purchasing power" to inflation is equally bad (just not as "visible" as red in the gain/loss column).

Don't get me wrong, I'm annoyed every month I update our "Personal Rate of Return" and/or look at our "bond" accounts/funds - it "hurts" putting more money in each month and seeing the balance go down... So, I can completely understand the mentality of OP... And I've even had similar thoughts...

But the market is going to do what the market is going to do... We are currently in a [mostly still] "rising" or "high" rate environment, which is when nominal bond funds "lose money." That's just how it works... Now, "if held to maturity" (or in the case of a bond fund, if held until its "duration"), in theory that doesn't matter - as we still get paid back our principle + interest (and for "new" bonds those will be at a higher rate). That's why bond funds that align with one's duration (short-, medium-, or long-term) actually have less interest risk - even if the longer ones might "feel" more volatile - as you aren't as exposed to the "re-investment" at a lower rate (as the duration aligns with your timeline).

So, as others mentioned, how will OP feel in 5 years, 10 years, if we are back in a "falling" rate environment. Again, this strategy will see their "balance" remain positive. But they could well be losing to inflation, and could well be losing to "staying the course" where the fact that the rates are falling would mean the bond values are risings (as again that's just how the bond market works).

I'd also add that I find it ironic/interesting how much energy and thought goes into something like fixed income - when it arguably has very little impact on our overall return/plans/etc. I'm as guilty of this as anyone... For the most part, I'm a "three fund" investor... Except I have I Bonds, EE Bonds (I'm the author of the EE Bond Manifesto), Total Bond, Long Term Treasuries, Short Term Treasuries, National & State Muni Bond funds 2 different Money Market funds, cash in bank accounts. My "3 fund" went to "12 fund" - with all but 2 of those being in "fixed income." I'd be shocked if that "extra complexity" makes a measurable difference in our retirement plans/returns/etc. My advice to my child is the same as to my spouse (if they outlive me) - "sell everything in tax-advantaged space and replace it with a "balanced fund" or "target date fund." It's "good enough", and we can spend more of our remaining energy focused on enjoying our life, not worrying about "which" fixed income investments we have...
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by LadyGeek »

life_force_prana - In order to provide appropriate advice, it's best to keep all the information in one spot. I merged your update back into the original thread. If you have any questions, ask them here.

(Thanks to the member who reported the post and provided a link to this thread.)
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dcabler
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Re: Plan to exit Bonds Funds

Post by dcabler »

life_force_prana wrote: Mon Apr 01, 2024 6:07 pm
Silverado wrote: Mon Apr 01, 2024 5:50 pm Doesn’t seem like a good plan to me. But sounds like you are doing it regardless of critique, which is of course fine. I don’t pay much attention to what my bond funds do year to year, I just buy them like I buy equities. Used to be a lot more equities, but now it is a lot more bond fund each month. Seems possible this is the best time in my investing career to being buying US Bond Index. Possible it will be the worst as well. Either way, it’s head down and keep plowing along. Might buy a couple individual bonds sometime soon just for the experience.
I did not pay much attention to my Bond Index funds either accumulating, neither do much today (infact I am reimvesting dividends in my 401k so am buying cheap) but I know it will matter when I am in retirement and 2022 happens...it is easy/good bond accumulation tool in 401k etc., but not much help in decumulating...
It's not as bad as some people think.
- I prefer to duration match, at least right now, during decumulation using 2 TIPS funds. Been doing it for a while now and it works fine. I will switch to a TIPS ladder in 1-2 years, however, so that it can be "hands off" income for my disinterested spouse
- But even if you don't duration match with bond funds and simply hold an intermediate bond fund, you can amortize withdrawals based on current yields and number of years remaining in your retirement planning. It only gets a little wonky when the remaining investment horizon is less than the duration of the bond fund, which generally happens so late in the game that you might not even care by then.
- There's even a simple version of duration matching where one starts long, then switches to intermediate, then short and if need be, ultra short in discrete steps. You make the switch at each point just before the investment horizon drops below the duration of the current bond fund you're holding. Again, you're amortizing to calculate the withdrawals.

The second two can be done with either TIPS or Nominals, though with Nominals you need to geometrically subtract expected inflation from the nominal yield to get the real yield and with TIPS you'll need to find the real yield of the funds you're using (not always published by the fund companies, but #cruncher publishes them weekly). And you can do all of these the same way that some do when they hold TIPS ladders - and that is to not rebalance, again allowing you to ignore the current price of the holdings (except for the first one when you rebalance between the 2 TIPS funds to reduce the effective duration over time).

Cheers.
Last edited by dcabler on Mon Apr 01, 2024 6:33 pm, edited 2 times in total.
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Re: Plan to exit Bonds Funds

Post by beyou »

life_force_prana wrote: Mon Apr 01, 2024 6:03 pm This is more like "should I go 100% VTSAX" when market is down, or "Ill never invest in stock again" when market is high...exact opposite of what you are saying...also in bonds where math is well defined unlike stocks...
How do you know the bond market is that far down ? It could go MUCH MUCH lower, or the opposite.
It is the idea that people make emotional decisions rather than just do asset allocation and realize they can't time the market.
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Re: Plan to exit Bonds Funds

Post by KanCityKid »

life_force_prana wrote: Mon Apr 01, 2024 3:52 pm I like my fixed income to never go down in nominal terms. Hence, I like I/EE Bonds, individual TIPS/T-Bills held to maturity, HYSA and Stable Value Funds (all of which I call Cash-like). My AA is 65/35 and of the 35, 25% is Cash-like, with remaining 10% in Total Bond Index (in 401Ks) and VTEB (in taxable).

I am thinking about best plan to exit this 10% and get to AA 65/35 with all 35% in cash-like. I am in no rush and prefer to get there over time. I am likely 5-8 years from retiring. All new money for most part is going to I/EE/TIPS/Tbills/HYSA/SVF.

My current thinking is to wait till interest rates drop then exit Total Bond in 401Ks to either SVF or Stocks to stay at 65/35 AA. And to exit VTEB in taxable upon retirement as am currently in highest tax bracket.

Could you please critique my plan? Would you offer a different plan?
Intermediate bond yields can remain elevated for periods for long periods. In 1964, 10-year average yield was 4.19, about where it is now. It continued to rise from there and would not go below 5% until 2002. If you are set on exiting Total Bond and VTEB, consider starting now by making monthly transfers over a few years. I took a similar approach when I made the decision to change from a mostly equity/bond fund portfolio to a mostly balance fund/money market fund portfolio.
They’re called economic cycles for a reason, and it’s not different this time, so buckle up, buttercup.
rockstar
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Re: Plan to exit Bonds Funds

Post by rockstar »

SnowBog wrote: Mon Apr 01, 2024 6:23 pm
rockstar wrote: Mon Apr 01, 2024 5:58 pm
Silverado wrote: Mon Apr 01, 2024 5:50 pm Doesn’t seem like a good plan to me. But sounds like you are doing it regardless of critique, which is of course fine. I don’t pay much attention to what my bond funds do year to year, I just buy them like I buy equities. Used to be a lot more equities, but now it is a lot more bond fund each month. Seems possible this is the best time in my investing career to being buying US Bond Index. Possible it will be the worst as well. Either way, it’s head down and keep plowing along. Might buy a couple individual bonds sometime soon just for the experience.
Much better than buying a zero or negative real yield like in the past. You can with certainty buy a 2% real yield pretax across must of the curve. Certain bits are lower. But most will get you 2%+ real. That’s a good bond return.
But OP isn't moving 100% to TIPS... OP isn't (as least as I understand) never going to buy TIPS in the future, where/when again they might end up having a "zero or negative" real yield - you know, just like in the past..

Again, this appears to be an exercise in "market timing." Right now, today, with rates as they are - this model might "make sense"...

Will it if/when we face deflationary periods, falling rates, etc.? When maybe OP needs to add a lot of bonds to maintain their AA and the only ones they can get have horrible interest rates?

In other words - OP is creating a larger interest rate risk with this approach. If future rates go down, they won't be able to maintain the high rates they have now, and could very well end up losing to inflation. Sure, they don't have to "watch" their principle get smaller... But "losing purchasing power" to inflation is equally bad (just not as "visible" as red in the gain/loss column).

Don't get me wrong, I'm annoyed every month I update our "Personal Rate of Return" and/or look at our "bond" accounts/funds - it "hurts" putting more money in each month and seeing the balance go down... So, I can completely understand the mentality of OP... And I've even had similar thoughts...

But the market is going to do what the market is going to do... We are currently in a [mostly still] "rising" or "high" rate environment, which is when nominal bond funds "lose money." That's just how it works... Now, "if held to maturity" (or in the case of a bond fund, if held until its "duration"), in theory that doesn't matter - as we still get paid back our principle + interest (and for "new" bonds those will be at a higher rate). That's why bond funds that align with one's duration (short-, medium-, or long-term) actually have less interest risk - even if the longer ones might "feel" more volatile - as you aren't as exposed to the "re-investment" at a lower rate (as the duration aligns with your timeline).

So, as others mentioned, how will OP feel in 5 years, 10 years, if we are back in a "falling" rate environment. Again, this strategy will see their "balance" remain positive. But they could well be losing to inflation, and could well be losing to "staying the course" where the fact that the rates are falling would mean the bond values are risings (as again that's just how the bond market works).

I'd also add that I find it ironic/interesting how much energy and thought goes into something like fixed income - when it arguably has very little impact on our overall return/plans/etc. I'm as guilty of this as anyone... For the most part, I'm a "three fund" investor... Except I have I Bonds, EE Bonds (I'm the author of the EE Bond Manifesto), Total Bond, Long Term Treasuries, Short Term Treasuries, National & State Muni Bond funds 2 different Money Market funds, cash in bank accounts. My "3 fund" went to "12 fund" - with all but 2 of those being in "fixed income." I'd be shocked if that "extra complexity" makes a measurable difference in our retirement plans/returns/etc. My advice to my child is the same as to my spouse (if they outlive me) - "sell everything in tax-advantaged space and replace it with a "balanced fund" or "target date fund." It's "good enough", and we can spend more of our remaining energy focused on enjoying our life, not worrying about "which" fixed income investments we have...
It's not market timing. It's a decision to avoid risk to principal.

Concerning your interest rate risk, how much duration is enough? And what's the plan once you reach that duration? I'm pretty sure BND is around 6-7 years. What then?
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Re: Plan to exit Bonds Funds

Post by SnowBog »

rockstar wrote: Mon Apr 01, 2024 7:32 pm
SnowBog wrote: Mon Apr 01, 2024 6:23 pm
rockstar wrote: Mon Apr 01, 2024 5:58 pm
Silverado wrote: Mon Apr 01, 2024 5:50 pm Doesn’t seem like a good plan to me. But sounds like you are doing it regardless of critique, which is of course fine. I don’t pay much attention to what my bond funds do year to year, I just buy them like I buy equities. Used to be a lot more equities, but now it is a lot more bond fund each month. Seems possible this is the best time in my investing career to being buying US Bond Index. Possible it will be the worst as well. Either way, it’s head down and keep plowing along. Might buy a couple individual bonds sometime soon just for the experience.
Much better than buying a zero or negative real yield like in the past. You can with certainty buy a 2% real yield pretax across must of the curve. Certain bits are lower. But most will get you 2%+ real. That’s a good bond return.
But OP isn't moving 100% to TIPS... OP isn't (as least as I understand) never going to buy TIPS in the future, where/when again they might end up having a "zero or negative" real yield - you know, just like in the past..

Again, this appears to be an exercise in "market timing." Right now, today, with rates as they are - this model might "make sense"...

Will it if/when we face deflationary periods, falling rates, etc.? When maybe OP needs to add a lot of bonds to maintain their AA and the only ones they can get have horrible interest rates?

In other words - OP is creating a larger interest rate risk with this approach. If future rates go down, they won't be able to maintain the high rates they have now, and could very well end up losing to inflation. Sure, they don't have to "watch" their principle get smaller... But "losing purchasing power" to inflation is equally bad (just not as "visible" as red in the gain/loss column).
...
It's not market timing. It's a decision to avoid risk to principal.
There's a difference between "what you buy today", and "what you'll buy next year, the year after, the year after, etc."

What would you recommend OP (or yourself) buy when interest rates are back < 1%, and TIPS are back to <= 0% "real"?

It is highly unlikely that we'll remain in a "high interest rate" environment, when that changes when you go to buy your next fixed income investment, it will be at a lower interest. That is "interest rate risk" - as you are exposed on "new" or "reinvestments" to "whatever the current interest rate available" is. And the concern is this "strategy" is going to be hard to keep when at that point in time, other investments "appear better." (AKA you are attempting to "time" the market by buying what appears the "best" at that point in time.)
rockstar wrote: Mon Apr 01, 2024 7:32 pm Concerning your interest rate risk, how much duration is enough? And what's the plan once you reach that duration? I'm pretty sure BND is around 6-7 years. What then?
As others have noted, you could look to a longer-term duration, or a blend of durations, or even a ladder of individual bonds - lots of options to address duration...

Or you can simply accept that you can't control interest rates - they are going to be what they are... Which is exactly what we do on the stock side... We just "accept" whatever the market provides...

If you've switched to "cash like" options, historically (and excluding TIPS & I Bonds), those haven't fared well vs. inflation... So again, you protect your principle but at the cost of "purchasing power"...

If you stick with "normal" bond funds, yep you might have some "painful" years - like the last few years. But again, historically bonds return to their "normal cycles", meaning that the "pain" of rising rates (as they rise) gets balanced with the "benefit" of owning higher rates (as they fall), and historically they've don't OK against inflation.

If it helps, let's look at an example with $10k invested, $10k added every year, for as many years as data exists (2001 - 2023) for "cash" vs. "total bond" vs. "TIPS" (which limits history to 2021): https://www.portfoliovisualizer.com/bac ... JQrv4tXDE8.
  • Cash succeeds in "protecting principle" - max downdraw was 0%, worst year was 0.03% gains, best year was 5.2%, final balance $365,595
  • TBM had some tough years, max downdraw of -17.6%, worst year of -13.3%, best year of 8.6%, ended up with more money @ $401,247
  • TIPS (over this time period) were slightly less volatile, max downdraw -13.5%, worst -12%, best 16.6%, basically tied with TBM until 2021 where its pulled slightly ahead (due to high inflation) and ends up with the most (over this time period) with $433,291
FWIW, TIPS & TBM have nearly identical Sharpe Ratio, with TIPS having a slightly (0.07) Market Correlation...

Now, will the "difference" between these be overly material? IMHO not so much...

If we add in 25% international, 40% US stock, and change the "fixed income" to 35% (guess at OP's 65/35 AA mix) - the ending difference is roughly 0.33% CAGR (or about 6% of ending value). https://www.portfoliovisualizer.com/bac ... LQYWZVT4UZ

The difference is basically within the margin of error of a "good" sequence of returns vs. "bad" sequence of returns, or changing one's AA by 5%.

This was my prior comment, on how I find the amount of energy/analysis/complexity applied to "fixed income" to be ironic & interesting (and I'm equally as guilty). We spend cycles trying to find the "best" FI mix - when it's basically a rounding error in the grand scheme of things...

So, do I think OP's plan is a "good" one - nope. I think they are trading one risk for another, and will likely end up with less money (which probably wasn't what they assumed would happen) as a result. But on the upside, they won't have to "see" a negative balance along the way.

But do I think OP's plan is a "bad" one - nope, at least not if it helps them maintain their 65/35 AA and "stay the course."

It mostly just feels like "something to do", and yes "market timing", in that since current rates are high, and bond funds are taking a beating - it's hard to "stay the course" and remain invested in them... If this is a one-and-done change, it likely won't be determinantal to their long-term results. But if this is a pattern of "performance chasing" (or an attempt at "loss avoidance"), and this is just one of many "let's try this today" things they do over their investing career - then I'd start to be more concerned...
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Re: Plan to exit Bonds Funds

Post by RyeBourbon »

SnowBog wrote: Tue Apr 02, 2024 12:29 am What would you recommend OP (or yourself) buy when interest rates are back < 1%, and TIPS are back to <= 0% "real"?

It is highly unlikely that we'll remain in a "high interest rate" environment,
I don't believe we are in a "high interest rate" environment, historically speaking, and I don't think anyone can say whether it's likely or not we remain in this interest rate environment and for how long.
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TimeIsYourFriend
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by TimeIsYourFriend »

retiredjg wrote: Thu Mar 21, 2024 5:16 pm I don't have an opinion, but a warning.

If you have or will use backdoor Roth in 2024, do not roll anything into tIRA until 2025. If you do, you will be back to pro-rating everything that happens in your IRA.

This has been a very common mistake this year. Apparently people who have used the backdoor method for a long time just forget about waiting that last year.

So no, you may not even get access to the 2% real return if you have to wait.
I don't understand this. Can you elaborate? Did something change in 2024? I did my normal backdoor roth via contributing to a tIRA and converting to roth this year like I normally do every Jan.
"Time is your friend; impulse is your enemy." - John C. Bogle
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by RyeBourbon »

TimeIsYourFriend wrote: Tue Apr 02, 2024 6:42 am
retiredjg wrote: Thu Mar 21, 2024 5:16 pm I don't have an opinion, but a warning.

If you have or will use backdoor Roth in 2024, do not roll anything into tIRA until 2025. If you do, you will be back to pro-rating everything that happens in your IRA.

This has been a very common mistake this year. Apparently people who have used the backdoor method for a long time just forget about waiting that last year.

So no, you may not even get access to the 2% real return if you have to wait.
I don't understand this. Can you elaborate? Did something change in 2024? I did my normal backdoor roth via contributing to a tIRA and converting to roth this year like I normally do every Jan.
Nothing has changed. If you have a pre-tax tIRA balance at the end of 2024, your conversion will be pro-rated.
Retired June 2023. AA = 55/35/10
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retiredjg
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by retiredjg »

TimeIsYourFriend wrote: Tue Apr 02, 2024 6:42 am
retiredjg wrote: Thu Mar 21, 2024 5:16 pm I don't have an opinion, but a warning.

If you have or will use backdoor Roth in 2024, do not roll anything into tIRA until 2025. If you do, you will be back to pro-rating everything that happens in your IRA.

This has been a very common mistake this year. Apparently people who have used the backdoor method for a long time just forget about waiting that last year.

So no, you may not even get access to the 2% real return if you have to wait.
I don't understand this. Can you elaborate? Did something change in 2024? I did my normal backdoor roth via contributing to a tIRA and converting to roth this year like I normally do every Jan.
Nothing has changed. As you probably know, to avoid pro-rating that backdoor Roth must have nothing in traditional IRA at the end of the year.

Several people have reported retiring mid-year and rolling their 401k into tIRA....after having used the backdoor Roth method earlier in the year. This triggers what people call the "pro-rata" rule for that year's backdoor Roth and for the tIRA until it is empty. Most people want to avoid that.
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Re: Backdoor Roth vs TIPS Ladder - want both but wary of prorata rule

Post by TimeIsYourFriend »

retiredjg wrote: Tue Apr 02, 2024 7:05 am
TimeIsYourFriend wrote: Tue Apr 02, 2024 6:42 am
retiredjg wrote: Thu Mar 21, 2024 5:16 pm I don't have an opinion, but a warning.

If you have or will use backdoor Roth in 2024, do not roll anything into tIRA until 2025. If you do, you will be back to pro-rating everything that happens in your IRA.

This has been a very common mistake this year. Apparently people who have used the backdoor method for a long time just forget about waiting that last year.

So no, you may not even get access to the 2% real return if you have to wait.
I don't understand this. Can you elaborate? Did something change in 2024? I did my normal backdoor roth via contributing to a tIRA and converting to roth this year like I normally do every Jan.
Nothing has changed. As you probably know, to avoid pro-rating that backdoor Roth must have nothing in traditional IRA at the end of the year.

Several people have reported retiring mid-year and rolling their 401k into tIRA....after having used the backdoor Roth method earlier in the year. This triggers what people call the "pro-rata" rule for that year's backdoor Roth and for the tIRA until it is empty. Most people want to avoid that.
Whew, thanks! Glad they didn't change any law I didn't know about.
"Time is your friend; impulse is your enemy." - John C. Bogle
SnowBog
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Re: Plan to exit Bonds Funds

Post by SnowBog »

RyeBourbon wrote: Tue Apr 02, 2024 6:33 am
SnowBog wrote: Tue Apr 02, 2024 12:29 am What would you recommend OP (or yourself) buy when interest rates are back < 1%, and TIPS are back to <= 0% "real"?

It is highly unlikely that we'll remain in a "high interest rate" environment,
I don't believe we are in a "high interest rate" environment, historically speaking, and I don't think anyone can say whether it's likely or not we remain in this interest rate environment and for how long.
Fair - I should have said "relative to recent history"... But that doesn't change my point... A few years ago when interest rates were near 0%, TIPS had a "real" rate of 0% or negative, and people were talking about "rates will fall forever" and "we'll get into negative interest rates", people had a much different outlook - and no one (or nearly no one) was proposing doing something as the OP is proposing.

Hence when people have commented this is a bit of "market timing." This decision/approach is presumably based on current market conditions, maybe with an assumption of what future conditions will be (projecting that they remain as they are now). Would/will OP make the same decision if/when rates return to near 0% - and "cash is trash" once again? Note, I'm not saying "when" this will occur - as you are correct - no one knows... But I know it will occur - as much as I know a market crash will occur - as history likes to repeat itself. We just don't know when...

Now if they are committed to preserving principle, and will "stay the course" with this approach, it might "cost" them some buying power, but it won't be detrimental to their overall success (based on the quick estimate above at worst 0.3% CAGR - again well within the margin of returns themselves). But if they create a habit of "chasing rates" - that's different... Ideally a "strategy" should hold up under all market conditions, and hence why I ask how they'll handle the inevitable return to a "lower" rate environment (which might happen this year, next year, a decade from now, or sometime after - but it will happen).
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